How network costs drive price in the National Electricity Market: The latest from the ACCC Retail Electricity Pricing Inquiry

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We have looked at a range of reports, inquiries and policies over the last few months which are, at least in part, a response to the relative rise in electricity prices in recent years. These include:

By Dr Drew Donnelly, Compliance Quarter

Today we look at the Australian Competition & Consumer Commission (ACCC)’s preliminary report on retail electricity pricing (released 16 October), with a focus on what the ACCC considers to be the biggest contributor to climbing electricity prices – increased network costs (see https://www.accc.gov.au/media-release/electricity-report-details-affordability-competition-issues). .

The ACCC Report

In March 2017 the Federal Government asked the ACCC to hold an inquiry into the retail supply of electricity and the competitiveness of retail electricity markets in the National Electricity Market. They have produced a preliminary report (the ACCC Report) on the basis of:

  • information and data received from industry participants, consumers and government agencies
  • more than 150 submissions received responding to an Issues Paper released in May, and spoken with consumers and businesses throughout the regions.

The ACCC broke down cost increases by type (costs which are eventually passed on to customers in the retail price) and found that over the period 2007-08 to 2015-2016:

  • wholesale costs were relatively flat in nominal terms over the period, and decreased in real terms;
  • network costs increased significantly and have been the main driver of increases in retail prices;
  • environmental costs increased significantly;
  • retailer costs increased significantly since competition was introduced (See the ACCC Report, p76).

Network Costs

The ACCC suggests that customers have not received value for money from network operator investment in its networks. There are several reasons suggested, including:

  • Underutilisation of the existing asset base. As the regulatory framework for network operators is based on forecasting, assets can get built that are not required, and the network operator will still receive a return on that investment over the life of the asset (ACCC Report, p10);
  • An incentive to over-invest or ‘gold-plate’ the network, as the operator can recoup the costs by passing it on to the retailer and eventually the end-use (ACCC Report, p111);
  • Inaccurate demand forecasting. Better forecasting could reduce the amount of unnecessary network costs for customers (ACCC Report, p112).

Where to from here?

The ACCC does not set out final recommendations for reducing network costs and suggests that such recommendations would guide their future report due in June 2018. However, The ACCC cites favourably the suggestion in the Finkel Review of writing down asset values, either voluntarily or compulsorily, where appropriate where there is evidence of over-investment (ACCC Report, p153). It also supports the abolishing of Limited Merits Review as a way of reining in these costs.

 

 

 

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